GM Stock: Trading, But With Training Wheels

By

Matt Phillips

Nov 19, 2010 1:10 pm ET

Thomson Reuters

Check out the chart of General Motors, trading in its second day on the NYSE. Early on it looked like the shares were going to fall and punch through the $33 debut price. Then a mystery buyer swept in at around $33.11 and the stock beginning a slow, steady grind higher.

While the photo ops were all yesterday, there’s still a lot left at stake in the “new” GM’s first few trading days. For one thing there’s the question of what’s known in the stock market as the “green shoe.”

The “green shoe” is an overallotment option. As The Journal explained a while back, “green shoe” options are common feature of IPOs. They let underwriters — in the case of GM that’s J.P. Morgan and Morgan Stanley — sell additional shares at the IPO price if the demand is there. The GM green shoe allows the underwriters to sell an additional 71.7 million shares, they have 30 days to decide if they want to do it.

Think of it as a reserve tank of shares that can be used to capitalize an especially strong demand. When things go well and the green shoe is exercised, it can be good for everybody. The company that’s going public raises additional capital by selling more shares. Investors get the stock they seek. And the underwriters, who get paid based on the shares they sell, rake in fatter fees.

On the other hand, if a newly floated public company looks like it’s trading weakly, the underwriters can choose not to trot out the green shoe, essentially keeping the supply of shares lower and helping to prop up the price. There’s a few reasons they might want to do that.

For one thing if the shares fall below the offering price, a lot of investors who bought stock based on the advice of the underwriters are going to be annoyed. Also, from an optics standpoint, seeing a freshly minted stock fall below the offering price just looks bad for underwriters. On the street, it basically raises questions about their ability to accurately price a deal. Besides the bit of egg on their face, underwriters also would not see their fees boosted by the sale of the reserve tank of shares.

And in the case of GM it may mean the Treasury could end up with less cash than it wanted from the sale of its shares. The headline numbers that have been trumpeted for IPO are often based on the full exercise of the green shoe. Given the victory lap the Obama administration has taken on the IPO, having to correct the record to reflect a lower level of cash garnered from the IPO would not be a good outcome for the government or for the Wall Street firms Uncle Sam tapped to manage this thing.